French election result gives markets a ‘breather’

Emmanuel Macron’s victory in the French presidential election could deliver a “substantial boost” to markets, with a relief rally likely in the short term, according to State Street Global Advisors.

State Street Global Advisors head of investments for Europe, the Middle East and Africa Bill Street says Mr Macron’s victory in the 7 May vote over populist candidate Marine Le Pen “offers nothing but upside surprises”.

“In a do-nothing scenario, we have the status quo of political paralysis, but with a favourable external environment and steady growth improvement,” Mr Street said.

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“In the Goldilocks scenario, Macron gets a working parliament and builds a partnership with Germany to launch meaningful reforms. That would deliver a substantial boost to markets by year end, which is currently not priced in.”

Mr Street said the result could see a rally in markets in the near term as markets can relax about European politics for a few weeks.

“Emmanuel Macron’s victory gives markets a much deserved breather from European politics. This result, combined with last week’s preliminary Greek debt agreement, will be enough to support a short-term relief rally,” he said.

However, Franklin Templeton cautioned that any such rally “will likely be mitigated” by expected interest rate increases and a “renewed focus” on the challenges Mr Macron will face.

“We saw a partial rally in French equity markets after Macron’s first round success and we feel now investors’ attention may turn to his ability to govern after a difficult campaign,” the company said.

Franklin Templeton said Mr Macron’s administration will likely be a “continuation of the previous government” under former President Francois Hollande, albeit with a “more pro-investment” stance, but that his ability to enact his agenda will depend on the coalition he builds.

“Although Macron is a relative political newcomer, the nature of French politics means he will likely need to appoint some more established political figures from mainstream parties to his administration,” the company said.

“We think the political flavour of the coalition Macron builds will be important. While the new president has a more pro-business agenda than his predecessor Hollande, he might be significantly constrained in his social and economic reforms if he needs the support of both mainstream right-wing and left-wing parties.”